The GARCH-stable option pricing model

H. A. Hauksson, S. T. Rachev

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

An option pricing model is developed based on a generalized autoregressive conditional heteroskedastic (GARCH) asset return process with stable Paretian innovations. Our approach is based on the locally risk-neutral valuation relationship. Methods for maximum likelihood estimation of GARCH-stable processes are presented as well as empirical results for the DAX index. Finally, the results of Monte Carlo simulations evaluating prices of European call options, implied volatility, delta hedging parameters, and value at risk are presented.

Original languageEnglish
Pages (from-to)1199-1212
Number of pages14
JournalMathematical and Computer Modelling
Volume34
Issue number9-11
DOIs
StatePublished - Sep 24 2001

Keywords

  • GARCH-stable processes
  • Locally risk-neutral valuation
  • Option pricing
  • Stable distributions

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